Citation: 2010 TCC 482
Date: 20100924
Docket: 2008-1212(IT)G
BETWEEN:
Christiane Gagnon,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
[OFFICIAL ENGLISH
TRANSLATION]
REASONS FOR JUDGMENT
Archambault J.
[1]
Christiane Gagnon is
appealing from an assessment made by the Minister of National Revenue (the
Minister) pursuant to section 160 of the Income Tax Act (the
Act). The Minister held Ms. Gagnon liable for $22,113.72, which was
the tax debt of her common-law partner, Robert Desrosiers, in respect of the
2001 taxation year. On the date the assessment was issued, that is, April
12, 2007, the tax debt could be broken down as follows: $14,855.99 in tax, and
$7,257.73 in accrued interest.
The assessment was the result of a transfer made by Mr. Desrosiers on
March 4, 2001, by means of a notarial deed (deed of sale), of
his undivided half of the family residence located on Delisle Street in
Saint-Augustin-de-Desmaures (the residence). The deed of sale was
published on March 6, 2001.
Factual background
[2]
Ms. Gagnon and
Mr. Desrosiers purchased the residence on July 21, 1997. The
price agreed on was $215,000. (See Exhibit A‑1, tab 4.) In his
testimony, Mr. Desrosiers indicated that, before purchasing it, he had
disposed of another residence in 1997, which he had owned alone, even though he
had lived there with Ms. Gagnon. Mr. Desrosiers thought it would be
appropriate that Ms. Gagnon become a co-owner of the new residence.
[3]
A hypothec of $130,000
was granted to Ms. Gagnon and Mr. Desrosiers by the Caisse populaire
Laurier on July 11, 1997, in order to finance the acquisition of the
residence. On August 22, 1997, Mr. Desrosiers obtained a second
loan in the amount of $25.000, the repayment of which was secured by a hypothec
on the residence. However, Ms. Gagnon was not personally liable for that
loan, but only under that hypothec. (See Exhibit A‑1, tab 6.)
It seems that the first loan was refinanced with a new hypothec of
$175,000 granted by the Caisse populaire Laurier so that Mr.Desrosiers disposed
of $45,000 for use in his business. The deed was not offered in evidence; only
a financing offer dated April 29, 1999, and addressed to both
Mr. Desrosiers and Ms. Gagnon. (See Exhibit A‑1,
tab 7.)
[4]
On
March 4, 2001, Mr. Desrosiers transferred all his undivided
rights to the residence to Ms. Gagnon, except the right to use the
residence.
Ms. Gagnon also granted Mr. Desrosiers a right of use, as described
in article 13 of the deed of sale:
[Translation]
13.
RIGHT OF USE
The transferee grants, for life, the
enjoyment, as a right of use, to the transferor, accepting, of the
property subject to the instant transfer and described above, without being
bound to take out insurance or to furnish to the owner other security
guaranteeing the performance of his obligations.
This right of use is thus granted with the only
consideration being that the transferor will pay half of the property tax.
This right may not be assigned or seized.
[5]
The clause regarding
price in the deed of sale is worded as follows:
[Translation]
10.
PRICE
This transfer is granted for consideration of
the transferee’s assuming the following payments, and relieves the
transferor of all liabilities:
- The amount of EIGHTY-FOUR THOUSAND THREE HUNDRED
NINETY-NINE DOLLARS AND FORTY CENTS ($84,399.40),
representing the part owed by the transferor to the Caisse Desjardins de
Sainte-Foy, in accordance with deed number 495 611, published in Portneuf,
of which the total balance as at twenty [sic] HUNDRED NINETY‑EIGHT
[sic] DOLLARS AND SEVENTY‑NINE CENTS ($168,798.79);
-
The amount of
TWELVE THOUSAND FIVE HUNDRED DOLLARS ($12,500), representing the
part owed by the transferor to the Caisse Desjardins de Sainte-Foy, in
accordance with deed number 485 834, published in Portneuf, the total
balance of which, on February twentieth, two thousand-and-one (2001‑02‑20),
was TWENTY‑FIVE THOUSAND DOLLARS ($25,000.00), which the transferor
undertakes to repay alone and relieves the transferee of all liability. [sic]
[Emphasis added.]
[6]
Even though there is a
conflict between the introductory part of paragraph 10 and the end of the
sub-paragraph dealing with the $12,500 hypothec, which stipulates that it is [Translation] "the transferor
[who] undertakes to repay [it] alone and relieves the transferee of all
liability", the Minister assumed that Ms. Gagnon undertook to repay
the amount of $12,500. Thus, he assumed that Ms. Gagnon had paid a
consideration of $96,900 ($84,399 + $12,500). (See
paragraph 17(e) of the amended Reply to the Notice of Appeal.) According
to Ms. Gagnon and Mr. Desrosiers, Ms. Gagnon had in fact assumed
the entire hypothec of $25,000 and not just the $12,500 mentioned in the deed
of sale. However, as mentioned earlier, Ms. Gagnon was not personally liable
for the $25,000, but only under the hypothec. In addition, no other deed was
signed to amend the deed of sale dated March 4, 2001.
[7]
Mr. Desrosiers
indicated that he had transferred his undivided half of the residence (except
for the right of use) to Ms. Gagnon in order to protect her financial
situation because of his own financial problems. However, he did not know at
the time that he was indebted to the Minister. Although Mr. Desrosiers did
not challenge the Minister's assessment for the 2001 taxation year that
increased his business income, it seems that the increase was related to income
from alleged sales of property on behalf of third parties.
[8]
In the assessment made
under section 160 of the Act, the Minister relied on the assumption that
the fair market value (FMV) of the transferred property, namely, the undivided
half of the residence, was $137,000 at the time of the transfer. In support of
this assumption, the Minister provided an appraisal report for the residence,
prepared by Patrice Gagnon, accredited appraiser with the Canada Revenue
Agency. (See Exhibit I-4.) The appraiser determined that, on
March 6, 2001, the FMV of the residence was $274,000. He used the
direct comparison method. (See Exhibit I-4 and I-5.) He did not take into
account the fact that it was only an undivided half of the residence or that
there had been a dismemberment of the right of ownership, given the right of use
retained by Mr. Desrosiers. He also did not determine the FMV of the right
of use granted by Ms. Gagnon to Mr. Desrosiers.
[9]
Ms. Gagnon did not
call any expert witnesses or produce an expert's report to contradict the
appraisal prepared by Mr. Gagnon. However, she entered data on sales of
other properties in the same sector as the residence, which were taken from the
real estate broker database known as MLS. The real estate broker who gathered
the data testified at the hearing. Jocelyne Savard is an acquaintance of
Mr. Desrosiers. She spoke about several real-estate sales in the
Saint-Augustin-de-Desmaures sector, for which she provided sale prices and
values entered on the municipal appraisal roll. She determined a ratio between
the sale price and that value (price/municipal value ratio). (See
Exhibit A-1, tab 10.)
[10]
For example, it is
indicated that the first property found in Exhibit A-1, tab 10, page 52, was
sold for $175,000, while its municipal value was $142,000. She thus determined
that the property was sold at a price/municipal value ratio of 1.23
(175,000/142,000). Ms. Savard stated that she had determined an average
ratio of 1.104 based on data from 14 properties.
If this ratio were applied to the municipal value of the residence, which is
$214,000,
it would result in a market value of $236,256 would be obtained for the
residence. In cross-examination, Ms. Savard acknowledged that the sale
price/municipal value ratios that she had used to determine the average ranged
from 0.93 to 1.92. Furthermore, the age of the properties concerned ranged from
13 to 18 years, and maybe from 9 to 21 years.
[11]
Ms. Gagnon was also
issued an assessment dated September 1, 2006, under section 14.5 of
the Quebec Act respecting the ministère du Revenu (AMR)
given that Mr. Desrosiers was in default of certain applicable Quebec statutory provisions (see Exhibit A‑1,
tab 11). The assessment resulted from the transfer of the undivided half
of the residence by Mr. Desrosiers to Ms. Gagnon on
March 6, 2001. The amount assessed was $12,810.16. A similar
assessment in respect of the same transfer was issued on the same day under
subsection 325(2) of the Excise Tax Act (ETA) on behalf of
the Minister. The amount of that assessment was $17,815.44. (See Exhibit A‑1,
Tab 13.) In the memorandum on objection prepared by the objections officer
of the Ministère du Revenu du Québec (Revenu Québec), the sale price of
the residence was set at $199,424.40, and the FMV was a rounded value of
$230,000.
Accordingly, Ms. Gagnon's benefit was $30,575.60. Thus, the total value of
the residence seems to have been attributed to the undivided half.
[12]
It should be noted that
that FMV was determined by Gilles Vézina, Revenu Québec accredited appraiser,
on December 20, 2005. The appraisal date is also March 6, 2001
(Exhibit I‑2). Mr. Vézina estimated the value of the residence
by applying the rate of increase of house prices in Greater Québec, as
determined by the Canada Mortgage and Housing Corporation. Based on that
agency's data, the average price of houses rose from $85,000 to $91,600 between
1997 and 2001; that is, it increased by 7%. The appraiser multiplied the 1997
purchase price of $215,000 by 1.07, which gave an estimated value of $230,000.
[13]
Mr. Desrosiers made an
assignment in bankruptcy on January 30, 2007. (See Exhibit A‑1,
tab 16.) Revenu Québec filed a notice of objection to the discharge of the
bankrupt debtor dated July 27, 2007. In a transaction (settlement) deed
signed not only by Revenu Québec, but also by Mr. Desrosiers and
Ms. Gagnon, it is indicated that Mr. Desrosiers had transferred to
his spouse his undivided half of the residence on [Translation] "March 6, 2001". In that document,
the debt under the AMR and the debt under the ETA are mentioned. The
transaction indicates that Christiane Gagnon will pay Revenu Québec an
overall amount of $13,000 in order to settle the dispute resulting from the two
notices of assessment. However, in reality, an amount of $10,900 was paid by
Mr. Desrosiers' business. (See Exhibit A‑1, Tab 17.) Only
$2,100 was apparently paid by Ms. Gagnon. (See Exhibit A‑1,
tab 16, page 117.)
The issues
[14]
Ms. Gagnon's appeal
raises several issues, including the following:
(1)
Should the assessment
be vacated because the Minister assumed that the date of the transfer was March 6, 2001,
while the real date was March 4, 2001?
(2)
Should the interest
amount of $7,257.73 be excluded from the tax debt?
(3)
What was the FMV of the
right of ownership transferred by Mr. Desrosiers to Ms. Gagnon? Should
the right of use reserved by Mr. Desrosiers be taken into account?
(4)
What was the FMV of the
consideration provided by Ms. Gagnon? Should the other half of the $25,000
hypothec be added even though it was not mentioned in the deed of sale? Should
the right of use granted by Ms. Gagnon to Mr. Desrosiers at the time
of the transfer be taken into account?
Should the amounts of GST, QST and provincial income tax for which
Ms. Gagnon was held liable under provisions in the ETA and AMR similar to
those in section 160 of the Act also be taken into account?
Analysis
·
Invalid assessment
[15]
According to
Ms. Gagnon's counsel, the Minister had to assess her with great accuracy
because section 160 goes beyond what the law ordinarily prescribes, and,
essentially, made it possible to expropriate part the Ms. Gagnon's
property. This is an exceptional power. Since the assessment indicates that
ownership was transferred on March 6, 2001, while it was actually
transferred on March 4, 2001, that error invalidates the assessment. Counsel for
Ms. Gagnon was unable to cite any case law dealing with similar facts in
support of his claim. In my view, this argument is without merit. It is an
immaterial error. There was no prejudice to Ms. Gagnon. In fact, whether
the sale took place on March 4 or indeed March 6, 2001, has no
impact on the determination of the FMV. It does not significantly change the
appraisal process for the residence. Of course, had the sale taken place on
March 4, 2002, the situation might have been different. In addition,
the provisions in section 166 and subsection 152(3) of the Act should
be recalled:
166. Irregularities – An assessment shall not be vacated or varied on
appeal by reason only of any irregularity, informality, omission or error on
the part of any person in the observation of any directory provision of this
Act.
152(3) Liability not dependent on assessment – Liability for the tax under this Part
is not affected by an incorrect or incomplete assessment or by the fact that no
assessment has been made.
·
Whether the tax debt
includes interest
[16]
Ms. Gagnon's
counsel argued that the assessment could be only for the amount of $14,855,
that is, only the tax amount, and that the $7,257 in interest had to be
excluded because it was not part of the tax debt that existed during the year
of the transfer. In fact, at December 31, 2001, no such obligation
existed. Interest started to accrue only on April 30, 2002. In
support of his claim, he cited Currie v. Canada, 2008 TCC 338, [2008]
TCJ No. 266 (QL), where justice Rossiter (as he then was) specifically stated
at paragraphs 22 and 27:
22 Subparagraph 160(1)(e)(i) is really not applicable. Under
subparagraph 160(1)(e)(ii), the Appellant is liable for all
amounts which the transferor, that is the Estate, is liable to pay under the Act
in or in respect of the taxation year in which the property was transferred or
in a preceding taxation year - this means any amount owing for the transfer
of the Estate up to and including December 31st of the year of the
transfer. The Appellant is only liable for that which the Estate was liable
as per subparagraph 160(1)(e)(ii). The transfer most certainly took
place before Assessment #1. As a result, Assessment #1 must be sent back to the
Minister for recalculation and reconsideration, on the basis that the Appellant
is only liable for the amount owing by the transferor, that is the Estate, up
to and including December 31st of the year of the transfer and nothing more. This
is certainly consistent with Algoa Trust, supra. Also, the Appellant
specifically wanted to be repaid the $75,000, paid by him as interest, post the
Assessment #1. This amount will be deleted from the assessment, per my previous
comment and most certainly should be deleted to be consistent with Algoa
Trust, supra, in which Dussault T.C.J. set out the inability of
the Minister of National Revenue to levy interest against the transferee, at
pages 2002 and 2003:
.
. .
3. The rule stated in s. 160
of the Act does not have the effect of creating a tax debt. The effect of
the provision is not to create a second debt: there is only one tax debt.
The wording of the Act is quite clear: the purpose of s. 160 is
essentially to add another debtor who is jointly and severally liable with
the transferor. This new debtor is called the transferee. There is thus no new
debt created under the Act and the obligation arises not from the assessment
but from the Act itself. Fundamentally, therefore, there is only one debt
and only that debt can bear interest.
4.
First, subsection (1) of s. 160 in fact states that the transferee is jointly
and severally liable and that his or her liability is limited to the lesser of
the two amounts mentioned in s. 160(e)(i) and (ii), namely (i)
the value of the property transferred less the consideration, and (ii) the
total of all amounts which the transferor is liable to pay in or in respect of
the year of the transfer or any preceding year, that is to say, for the year of
the transfer and for any preceding years.
5.
Secondly, s. 160(2) provides that the Minister of National Revenue (“the
Minister”) may at any time make an assessment. This is also quite clear.
However, the limit imposed in s. 160(1)(e) must be observed for
each assessment.
6. Thirdly, I would say that
there is no provision of the Act regarding interest that may be applicable to
an assessment issued pursuant to s. 160 of the Act. This is logical,
since there is no new tax debt and an assessment under s. 160 already
incorporates the interest which the transferor owed in addition to the tax.
The assessment may also incorporate penalties and interest thereon.
. . .
27 The Appeal is allowed and the matter is referred back to the Minister
of National Revenue for reconsideration and reassessment on the basis that the
Appellant is not liable for interest on the Estate debt from December 31st of
the year of the transfer.
[Emphasis
added.]
[17]
As always, it is important to cite the relevant provisions of
the Act as a starting point for any analysis where there is a dispute as to
interpretation:
160. (1)
Where a person has, on or after May 1, 1951, transferred property, either
directly or indirectly, by means of a trust or by any other means whatever, to
. . .
(e) the transferee and
transferor are jointly and severally liable to pay under this Act an amount
equal to the lesser of
(i) the amount, if any, by which the fair market
value of the property at the time it was transferred exceeds the fair
market value at that time of the consideration given for the property,
and
(ii) the total of all amounts each
of which is an amount that the transferor is liable to pay under this Act in or
in respect of the taxation year in which the property was transferred or any
preceding taxation year,
but nothing in this subsection
shall be deemed to limit the liability of the transferor under any other
provision of this Act.
160. (1) Lorsqu’une personne a, depuis le 1er
mai 1951, transféré des biens, directement ou indirectement, au moyen d’une
fiducie ou de toute autre façon à l’une des personnes suivantes :
. . .
e) le bénéficiaire et l’auteur du transfert sont
solidairement responsables du paiement en vertu de la présente loi d’un montant
égal au moins élevé des montants suivants :
(ii) l’excédent éventuel de la juste valeur marchande
des biens au moment du transfert sur la juste valeur marchande à ce
moment de la contrepartie donnée pour le bien,
(ii) le total des montants dont chacun
représente un montant que l’auteur du transfert doit payer en vertu de la
présente loi au cours de l’année d’imposition dans laquelle les biens ont été
transférés ou d’une année d’imposition antérieure ou pour une de ces
années;
aucune disposition du présent
paragraphe n’est toutefois réputée limiter la responsabilité de l’auteur du
transfert en vertu de quelque autre disposition de la présente loi.
[Emphasis added.]
[18]
In
response to Currie, counsel for the respondent cited Montreuil v. R.,
1994 CarswellNat 2034, [1994] T.C.J. No 418 (QL), [1996] 1 C.T.C. 2182, a
decision rendered in 1994 by the late Judge Dussault. In that
decision, which is not mentioned in Currie, Judge Dussault adopted
an interpretation of subparagraph 160(1)(e)(ii) that is the
opposite of that adopted in Currie. Indeed, he held that that
subparagraph covered "all interest compounded on an outstanding tax debt
for a specified preceding taxation year at the time of the transfer or for the
taxation year during which the transfer occurred, whether these are compounded
before or after the year of the transfer." [Emphasis added.] Judge
Dussault based that ruling on the following analysis, found at
paragraphs 43 to 46 CarswellNat (39 to 42 QL):
43 On the second question, we need at the
outset to recall that on the date of death, which in my view is also the date
of the transfer as I explained above, paragraph 160(1)(e) of the
Act prescribed that the transferee and transferor are jointly and severally
liable to pay an amount equal to the lesser of the amounts specified in
subparagraphs 160(1)(e)(i) and (ii), i.e.:
(i)
the amount, if any,
by which the fair market value of the property at the time it was transferred
exceeds the fair market value at that time of the consideration given for the
property, and
(ii) the
aggregate of all amounts each of which is an amount that the transferor is
liable to pay under this Act or in respect of the taxation year in which
the property was transferred or any preceding taxation year.
44 In view of the facts admitted, the only problem here
concerns the interpretation of subparagraph 160(1)(e)(ii) for the
purpose of establishing the tax liability of the transferor pursuant to
this provision because it is used as one of the parameters to determine the
quantum of the transferee's liability. The problem stems here from the fact
that four different transferees were each entitled to an amount of $70,000
in the will such that even if each were jointly liable with the transferor or
his estate39 for no more than the value of the
property received, the payment of an equivalent amount by only one of these
transferees would not necessarily extinguish the total debt so that each of the
other transferees would also be held liable within the limits set by
paragraph 160(1)(e) of the Act. This question is also pertinent to
establish the effect of the payment of the amount of $117,239.94 by the
Estate in February 1991 pursuant to subsection 160(3) of the Act.
45 Subsection 161(1) of the Act prescribes
that interest is payable on any excess unpaid tax for a taxation year and that it is
"computed for the period during which that excess is outstanding". In
fact interest is compounded daily, and since 1987, compounded daily
pursuant to subsection 248(11) of the Act. The rate is prescribed by Part XLIII
of the Income Tax Regulations. Interest is payable as provided in
subsection 161(1) for as long as the tax payable for a "taxation
year" remains outstanding. Hence the only relationship that exists
between the interest on an outstanding tax liability and a "specified
taxation year" is precisely the relationship established in subsection
161(1) of the Act based on the amount of tax unpaid for this taxation year and
"for the period during which" the amount is outstanding. The tax
is the principal and the interest is the accessory. In this sense, interest
that compounds until full payment of an outstanding taxation amount for a
specified "taxation year" prior to the transfer constitutes,
whatever the year in which it is compounded, an amount that the transferor
is required to pay under the Act "in respect of" this preceding
taxation year according to the wording of subparagraph 160(1)(e)(ii)
as it applied prior to December 17, 1987, or "in or in
respect of" this preceding year according to the wording that has applied
since that date. Indeed, the Bordas dictionary40 defines the expression "à l'égard
de" in its usual and modern sense as meaning "envers" and
"en ce qui concerne". Moreover, the Grand Robert de la langue
française41 gives particularly to the word
"pour" the meaning of "en ce qui concerne" and "par
rapport à". The English expression used in subparagraph 160(1)(e)(ii)
"in respect of" has the same meaning and in my view corroborates the
interpretation to the effect that these expressions cover all interest
compounded on an outstanding tax liability for a specified preceding taxation
year at the time of the transfer or for the taxation year during which the
transfer occurred, whether these are compounded before or after the year of the
transfer. We also know
that the words "in respect of" have a very wide meaning, as
recognized by the Supreme Court of Canada in Norwegijick. In his
judgment in this case, Dickson J., who was later to become Chief Justice,
analyzed these words in the following terms:
The words "in respect of" are, in my opinion, words of the
widest possible scope. They import such meanings as "in relation to",
"with reference to" or "in connection with". The phrase
"in respect of" is probably the widest of any expression intended to
convey some connection between two related subject matters.
46 In my view, this is enough to dispose
of the second point. The question of determining whether an amount assessed
under section 160 bears interest by application of section 161 was not
raised as such and is not directly in issue here, and I thus need not rule
on this question.
[Emphasis
added.]
[19]
In my view, Judge
Dussault's interpretation is entirely consistent with the wording of
subsection 160(1) of the Act. Though it is true that, as Judge Dussault held,
the meaning of the French expression "pour une de ces années" is
broad enough to include the meanings of "en ce qui concerne" and
"par rapport à", the English version of subparagraph 160(1)(e)(ii)
dispels all doubt by defining tax debt, for the purposes of section 160,
as "an amount that the transferor is liable to pay under this Act in or
in respect of the taxation year in which the property was transferred or
any preceding taxation year". If the words "in respect of" were
not in the provision, it might be argued that the tax debt is that which
existed at the end of the year during which the transfer was made. However,
Parliament clearly intended, by adding the words "or in respect of",
not to impose any such limit.
[20]
Not only is
Judge Dussault's interpretation more consistent with the wording of the
section, it is also more consistent with Parliament's intention. Indeed, when a
taxpayer transfers property to a person with whom he or she is not dealing at
arm's length for a consideration that is less than the fair market value of the
property, the taxpayer is diminishing his or her assets by an amount that could
be used to pay off his or her tax debt. A taxpayer's tax debt is not limited to
the tax owed, but also includes interest and, if applicable, penalties. Why would Parliament want tax
authorities to be unable to recover the interest owed by the tax debtor when
the benefit received by the transferee is enough to allow him or her to assume
such an obligation?
[21]
In addition, I do not accept that Judge Dussault had rejected
that interpretation in his opinion for Algoa Trust, mentioned in Currie.
On the one hand, he did not do so explicitly, since he did not cite Montreuil. On the
other hand, there is nothing in his reasoning in Algoa Trust that would
lead me to believe that he changed his interpretation of
subparagraph 160(1)(e)(ii) of the Act.
[22]
Let us briefly review the facts of that case. Algoa Trust was
a shareholder of the Jaans Leasing. That company had reported dividends
totalling $78,000 in May and September 1982 in favour of Algoa
Trust. At the time of the transfer, Jaans had a tax debt of $88,244.82,
$21,952.37 of which was tax for 1980 and 1981 and $66,292.45 was interest (that
is, an amount more than three times as high as the tax) in respect of the 1978
to 1982 taxation years. (See Judge Rip's reasons for Algoa Trust v.
Canada, [1993] TCJ No. 15 (QL), 93 DTC 405 at page 406.) One of the
important issues before Judge Rip was whether the dividends constituted a
transfer of property within the meaning of section 160. Judge Rip held
that that was the case and confirmed the assessment made by the Minister under
section 160. However, payments had been made by Jaans, or by another party
on behalf of Jaans, to reduce its tax debt, and those payments had been made
during different taxation years from those indicated at the time of payment. Allowing
the appeal, Judge Rip referred the notice of assessment back to the Minister in
order that he redetermine the interest taking into account the payments made.
[23]
In the reassessment resulting from Judge Rip's decision, the
Minister determined a tax debt balance of $25,278.60, but Algoa Trust
challenged that reassessment. Judge Dussault heard that appeal. At paragraph 8 of his Reasons, Judge Dussault
stated that Jaans' tax debt for 1982 and the preceding years was $88,244.82, which was the same amount as that stated
by Judge Rip. According to Judge Dussault, Algoa Trust made a payment of
$57,387.14 on February 14, 1991. (See paragraph 13 of his
decision.) That payment was not acknowledged until 1993 and was applied to
reducing Jaans' debt retroactive to February 14, 1991. As the total
benefit received by Algoa Trust, which was determined under
subparagraph 160(1)(e)(i) of the Act, was $78,000, the amount of
the tax debt in respect of which Algoa Trust could be held jointly and
severally liable, could not exceed $78,000, even though the debt was $88,244.82
and interest continued to accrue. Since it had paid $57,387, Algoa Trust could
not have been held liable to pay more than $20,612.86 ($78,000 - $57,387.14).
[24]
That being said, there is nothing in Judge Dussault's reasoning
that would lead me to conclude that Algoa Trust could not be held liable for
interest accrued in respect of the tax debt owed after the year of the
transfer. Quite on the contrary, the assessment under section 160 was
dated November 20, 1989. On that date, $66,292 in interest had been calculated
in respect of the 1978 to 1982 taxation years. Since the transfers were made in
May and September 1982, it is quite likely that the interest of
$66,292 in respect of the 1979 to 1982 taxation years was for a period that
went beyond 1982. In fact, it is quite likely that the interest was calculated
up to the date of the assessment made under section 160 and dated February
20, 1989. Judge Dussault wrote at paragraph 14 that, between November 20, 1989
(date of assessment), and February 14, 1991 (date of payment), the debt
increased because of interest, and that, subsequently, the debt, reduced by the
payment of $57,387.14, continued to increase, reaching $26,810.36 by
December 21, 1995, according to the collection officer's
calculations. That was the date of the second assessment before
Judge Dussault. He wrote the following at paragraph 14:
Between November 20, 1989 (the date of the assessment) and
February 14, 1991 the total debt
increased because of interest, and subsequently the debt reduced by the payment
of $57,387.14 continued to increase, reaching $26,810.36 by December 21, 1995 according to Mr. Gélinas's calculations. It is now perhaps
$32,000 or $33,000, but again this is not significant. If Algoa Trust were
assessed now for the first time and a payment of $57,387.14 were received the
same day, clearly Algoa Trust could not be held liable for an amount greater
than $20,612.86 pursuant to s. 160(1)(e) and (3)(a), namely
the difference between the amount established under s. 160(1)(e), that is,
$78,000, and the amount already paid, namely $57,387.14. Even if nothing were
recovered from Algoa Trust for 50 years, in my opinion no more than
$20,612.86 could ever be recovered.
[Emphasis
added.]
[25]
To really understand the meaning of Judge Dussault's comments,
it must be understood that he was making a distinction between the interest
that could accrue on the amount established under section 160 and that
which was being accrued on the transferor's tax debt. Judge Dussault only
said that, in the first case, interest was not being accrued, while, in the
second case, it was. He wrote the following at paragraph 6:
6. Thirdly, I would say that there is no provision of the
Act regarding interest that may be applicable to an assessment issued pursuant
to s. 160 of the Act. This is logical, since there is no new tax
debt and an assessment under s. 160 already incorporates the interest
which the transferor owed in addition to the tax. The assessment may also
incorporate penalties and interest thereon.
[Emphasis
added.]
[26]
His reasoning is clearly expressed at paragraph 3,:
3. The rule stated in s. 160 of the Act does not have the
effect of creating a tax debt. The effect of the provision is not to create
a second debt: there is only one tax debt. The wording of the Act is quite
clear: the purpose of s. 160 is essentially to add another debtor who is
jointly and severally liable with the transferor. This new debtor is called the
transferee. There is thus no new debt created under the Act and the obligation
arises not from the assessment but from the Act itself. Fundamentally,
therefore, there is only one debt and only that debt can bear interest.
[Emphasis
added.]
[27]
Judge Dussault's reasoning seems to be cogent. If the
Minister could charge interest in respect of the amount determined under
section 160, he could, in some way, collect interest more than once on the
same debt: once from the principal debtor and another time from the transferee
(joint and several debtor). If there were several transferees, the Minister
could have as many times the interest. In addition, if the interest could be
calculated on the amount of the assessment determined under section 160,
that could mean that the amount that the transferee may have to pay would
exceed the amount of the benefit he or she received, which would be contrary to
the intent of section 160. That would be unfair.
[28]
On the other hand, nothing prevents the Minister from
holding the transferee liable for the interest owed by the transferor under
section 160. Thus, he can assess the transferee to pay the interest owed
by the transferor for any period after the year of the transfer, including, it
would seem, a period following the assessment under section 160, as long
as it is interest owed by the transferor. Obviously, as Judge Dussault held
in Algoa Trust, that interest amount could not exceed the limit
prescribed in subparagraph 160(1)(e)(i) of the Act, that is, the
amount of the benefit received by the transferee.
[29]
Accordingly, it cannot be convincingly argued that
Judge Dussault held that the transferee could not be held liable for the
interest accrued after the year of the transfer with respect to the
transferor's tax debt. For these reasons, I rule that Ms. Gagnon is liable
to pay the interest indicated in the assessment made by the Minister, namely,
$7,257.73.
·
Assessment of the
FMV of the transferred property at March 4, 2001
[30]
Since section 160
applies to transfers of property, it must be determined what the transferred
property is in this case. Mr. Desrosiers was not the sole owner of the
residence. The Civil Code of Québec (CCQ or the Civil Code)
recognizes various modes of ownership, one of which is co‑ownership. Co‑ownership
is ownership of the same property, jointly and at the same time, by several
persons each of whom is privately vested with a share of the right of
ownership. (See article 1010 of the CCQ.) Co‑ownership is called
undivided when the right of ownership is not accompanied with a physical
division of the property. In this case, Mr. Desrosiers and Ms. Gagnon
co-owned the residence. They both had a complete right of ownership, jointly
and at the same time. Mr. Desrosiers could transfer only the right that he
had to the property, namely, his undivided half, and the value of that
undivided half could not correspond to the FMV of the residence itself. The
value of the right that he had to the immovable, which he then transferred,
must therefore be determined. Subsection 160(3.1) of the Act provides an
explicit rule for an undivided interest. It reads as follows:
160 (3.1) Fair market value of undivided
interest – For the purposes of this section and section 160.4,
the fair market value at any time of an undivided interest in a property,
expressed as a proportionate interest in that property, is, subject to
subsection (4), deemed to be equal to the same proportion of
the fair market value of that property at that time.
[Emphasis
added.]
[31]
Therefore, if that rule
were followed, the undivided half would be worth half of the value of the
residence. In this case, however, from analyzing the deed of sale, it can be
seen that Mr. Desrosiers did not transfer all the rights that he had to
the residence to Ms. Gagnon. Indeed, Mr. Desrosiers reserved the
right to use the residence, use being one of the ingredients of ownership. In Quebec civil law, a complete right of ownership is composed
of all the attributes of ownership, which are the right to use, enjoy and fully
and freely dispose of the property. Dismemberment occurs when two or more
people each have one or more, but not all, of the ingredients of the right of
ownership to the same property. (See article 947 of the Civil Code.) In
this case, Mr. Desrosiers did not dispose of all of his rights; he
disposed only of a dismembered right of ownership, that is, of his right to
enjoy and fully and freely dispose of the property. He reserved the right of
use. In these circumstances, the dismembered right that Mr. Desrosiers
transferred to Ms. Gagnon could not be worth as much as a complete
undivided right of ownership he had to the residence, and, in my view, the rule
in subsection 160(3.1) of the Act does not apply as to the determination
of the FMV of a dismembered right. That subsection applies only to assessing an
undivided right. If Mr. Desrosiers had not reserved the right to use the
property and had disposed of the entire undivided right of ownership he had to
the immovable, the rule would apply. His undivided half would then be worth
half of the market value of the residence. However, the right to enjoy and
fully and freely dispose of the residence, which he transferred to
Ms. Gagnon, is worth less than 50% of the value of the residence.
[32]
Those are all the rules
that should guide the Court. To determine the FMV of the property transferred
by Mr. Desrosiers, it would still be useful to start from the FMV of the
residence. In this case, two approaches were proposed to the Court, one of
which was that used by Ms. Gagnon, who had filed in evidence data
containing the sale prices of numerous properties in
Saint-Augustin-de-Desmaures, from which she had deduced a formula to determine
the FMV of the residence. It was the sale price/municipal value ratio. No
appraisal experts testified to justify that approach or its results. However,
the Minister called the expert, Mr. Gagnon, as a witness. Mr. Gagnon
also filed his appraisal report. In that report, Mr. Gagnon used the direct
comparison method. He selected 3 of the 17 properties he had compiled. The
properties were in the same neighbourhood as the residence. Two of them were
located at 3015 and 3063 Delisle Street and one at 257 Alfred Desrochers Street. The three properties were sold close
to the appraisal date, which was March 4, 2001. He consulted the
contracts of sale concerning those three properties in the Quebec land register.
[33]
Even though he did not
go inside the residence, Mr. Gagnon was able to obtain data sheets from
the municipality describing the interior layout of the residence and the three
similar properties. The data sheet for the residence on which he had based
himself was dated April 27, 1998, which was the date of the last
visit of the City of Québec technician. Mr. Gagnon made
adjustments based on the lot sizes of the three similar properties and the
age of the buildings built on them. Indeed, he took into account a depreciation
factor to achieve the best comparability. He was able to make adjustments to
take into account the improvements on and distinctive features of the
properties. In particular, in addition to the surface area of the lot, he took
into account the surface area of the building, finishing of the exterior and
basement, existence of a garage and outbuildings, and equipment.
[34]
In his testimony, Mr.
Desrosiers explained the differences that existed between the state of the
residence in 2007, when appraiser Gagnon took the photo, and its state in
2001. He indicated that the moulding on the walls had been added in 2004, that
there was no fence or cedar hedge in 2001, and that a bay window had been added
where there used to be a balcony over the garage door. In addition, he
indicated the surface area of the finished part of the basement. It was 945 square
feet (30 by 31.5 feet), not 1,300 square feet as estimated by
appraiser Gagnon. Mr. Gagnon modified his report at the hearing to reflect
the smaller surface area. The FMV of the residence thus went from $274,000 to
$272,000. (See Exhibit I‑5.)
[35]
In my opinion,
Mr. Gagnon's appraisal is more convincing and has more probative value
than the assessment prepared by Ms. Savard based on an analysis of data
from MLS. The sale price/municipal value ratio approach can be useful when
there is no better method. However, in this case, the appraiser was able to
find three properties on the same street as the residence or in its
immediate neighbourhood. He was able to consult data sheets in order to take
into account the differences between the properties and was able to take into
account the interior layout of the residence and the three other properties.
The data used by Ms. Savard to justify the value that she determined are
for properties whose age may be significantly different from that of the
residence or which are not in the immediate neighbourhood of the residence or
which have dissimilar features. For all of these reasons, I accept the value
determined by Mr. Gagnon, taking into account the adjustment concerning
the smaller finished area in the basement. The FMV of the residence is thus
$272,000. Accordingly, the value of the undivided half is $136,000, as per the
rule in subsection 160(3.1) of the Act.
·
Value of the
dismembered right
[36]
No experts testified to
assess the FMV of the dismembered right transferred by Mr. Desrosiers.
Therefore, the Court had no aid in assessing it. In the circumstances, it
seemed appropriate to me to take into consideration a minimum value
attributable to the right of use, which must be subtracted from the FMV of the
undivided half. A minimum value of 5% of the value of Mr. Desrosiers'
undivided interest ($136,000), namely, $6,800, seems appropriate to me for
taking into account the right of use that he did not transfer to Ms. Gagnon.
[37]
It should be mentioned
that my colleague Justice Tardif was faced with a similar problem in Bergeron
v. The Queen, 2003 TCC 286, which counsel for the respondent relied on. In
that case, the tax debtor had transferred an immovable property to his spouse
using a deed of gift. That gift stipulated that it was [Translation] "made gratuitously but subject to the
donor's right to occupy the immovable during his lifetime". The immovable
could not [Translation] "be
sold or otherwise alienated whether for consideration or gratuitously without
the written consent of the donor". Justice Tardif had to decide whether
such conditions had an impact on the FMV of the transferred property. In ruling
that they had no impact, Justice Tardif applied Hewett v. Canada, [1997]
F.C.J. No. 1544 (QL), [1998] 1 CTC 106, 98 D.T.C. 6003. That decision of the
Federal Court of Appeal confirmed a decision by Judge McArthur reported at
[1996] T.C.J. No. 355 (QL) [1996] 2 C.T.C. 2560. The issue before the Federal
Court of Appeal was whether Judge McArthur was correct in attributing a
lower value to the undivided half interest transferred to his spouse. That
decision was rendered before subsection 160(3.1) of the Act was adopted.
Judge McArthur held that the undivided half interest had a lower value
than half of the value of the property, which was $160,000, that is, the FMV
was lower than $80,000. Relying on the testimony of a real estate appraiser,
who had indicated that the market value of a 50% share in the house had to be
significantly reduced, he found that the FMV was $40,000. According to the
appraiser, an investor or purchaser of the husband's undivided half interest
would have taken into account the fact that he would be buying only a half
interest in a property where the other undivided owner was already living.
Judge McArthur ruled as follows:
55 A purchaser from him would have to take into
consideration that he would obtain a 50 per cent interest as a joint tenant
with the appellant in the matrimonial home which she occupied with two
dependent children and a dependent grandchild. The purchase would be further
clouded by the fact that the appellant may have had a greater interest in the
home, given the troubled and inconclusive marriage relationship.
56 I find common sense dictates that the Minister
should find himself with no greater financial interest than that of the
appellant spouse at the time of the transfer. I accept the evidence of
Mr. Lee that that amount was the discounted sum of $40,000 and not
$80,000.
[Emphasis
added.]
[38]
That decision was upheld
by the Federal Court of Appeal as follows: "In this case that interest was
the taxpayer's joint tenancy interest in the family home as it existed
immediately prior to its release to his wife." ([1997] F.C.J. No. 1541,
para. 2, 98 DTC 6003). Justice Tardif used that approach to rule that the
right of use should not be taken into account because the time right before the
transfer took place should be the time considered. He stated as follows at
paragraph 47:
I believe that the FMV should be assessed immediately
before the transfer of the property, that is, before the property becomes
part of the transferee's assets. This interpretation appears to me consistent,
moreover, with the spirit of section 160 of the Act.
[Emphasis
added.]
[39]
The solution propounded
by Justice Tardif might be the desirable one. However, in my view, without
an amendment to the Act, such as the one made by Parliament when it adopted
subsection 160(3.1), applicable since June 4, 1999, it is
eronious. The time prescribed by subparagraph 160(1)(e)(i) to
appraise a property is "at the time it was transferred". Clearly, the
property that must be appraised is the transferred property, in this case, the
dismembered undivided right. If we applied the Bergeron doctrine to a
case where a person who owned an immovable alone alienated only one undivided
half of it, we would reach, in that case, an FMV of 100% of the value of the
property, not 50%. Indeed, before the transfer, the transferor held 100% of the
property. Therefore, the solution would not be appropriate.
[40]
Accordingly, I find
that the FMV of the rights transferred by Mr. Desrosiers to Ms. Gagnon was
$129,200 ($136,000 - $6,800).
·
The FMV of the
consideration given by Ms. Gagnon
[41]
The Minister assumed
that the FMV of the consideration paid by Ms. Gagnon was $96,900 because
of the hypothecs that she assumed, as described in the deed of sale.
Ms. Gagnon argued that $12,500 should be added to that amount to take into
account the fact that she had assumed the entire hypothec of $25,000, and not
only half of it as stipulated in the deed of sale. The evidence offered by
Ms. Gagnon did not satisfy me that such was the case. First, the notarial
deed of sale was not amended to make Ms. Gagnon responsible for the full
amount of $25,000. The deed of sale mentions only $12,500. No evidence was
submitted showing that Ms. Gagnon had paid an amount over and above the
amount that she had assumed. In my opinion, the Court cannot go beyond the
wording of the deed of sale.
[42]
However, in addition to
the hypothecs that she assumed, Ms. Gagnon, who owned an undivided half of
the residence, granted Mr. Desrosiers a right to use her undivided half.
She therefore diminished her assets by accepting to reduce the right of
ownership she had to the residence. Consequently, the value of the right of use
she transferred should be added to the $96,600 consideration acknowledged by
the Minister. Her right of use was not appraised. Unlike the right of use
reserved by Mr. Desrosiers, the one granted by Ms. Gagnon had been
declared non-assignable. In the circumstances, that right did not, in my view,
have the same value as the right of use reserved by Mr. Desrosiers. In his
case, the right of use may be assigned. Accordingly, an amount lower than the
value accepted for the right of use reserved by Mr. Desrosiers should be
added to the FMV of the consideration paid by Ms. Gagnon. In the absence
of expert evidence, a value of 3% of the FMV of her undivided half seems
appropriate to me. Consequently, an amount of $4,080 will be added to the
consideration paid by Ms. Gagnon for a total of $100,980 ($96,900 +
$4,080). The value of the benefit conferred by Mr. Desrosiers on
Ms. Gagnon, determined based on subparagraph 160(1)(e)(i) of
the Act, is $28,220 ($129,200 - $100,980).
[43]
In partial settlement
of Mr. Desrosiers' tax debt under other tax statutes, such as the AMR and
the ETA (other tax statutes), Ms. Gagnon paid $2,100. Can that
amount be taken into account as part of the FMV of the consideration she paid
to Mr. Desrosiers?
[44]
It is clear that Ms.
Gagnon had not assumed such a liability when she signed the deed of sale.
However, pursuant to the other tax statutes, Ms. Gagnon became jointly and
severally liable with Mr. Desrosiers for his tax debt by accepting the
transfer of his undivided half of the residence. Can the amount she paid be
considered as part of the consideration she had paid for the undivided half of
the residence? In my view, the legal liability imposed by the provisions of the
other tax statutes and the acquisition of the undivided half are not
sufficiently related to make it possible to find that that amount was part of
the consideration. In addition, that approach would make it impossible to apply
section 160 because, if we considered the legal obligation created by
section 160 as being part of the consideration paid by Ms. Gagnon,
the result would be part of the calculation of the result, and the application
of that provision would be circular.
[45]
In these circumstances,
it seems to me that there is a significant flaw in the application of
section 160 of the Act, which does not take into account that a transferee
who was given a benefit by a transferor may be held liable to pay a higher
amount than the value of the benefit he or she received. The various tax
statutes should provide a mechanism that would make it possible to distribute
the benefit conferred by a transferor on a transferee among the various tax
liabilities. At the very least, it should be provided that a taxpayer may not
be held liable to pay, after taking into account all the tax statutes
establishing a similar rule to that established by section 160 of the Act, an
amount greater than the value of the benefit he or she received.
[46]
In this case,
fortunately for Ms. Gagnon, it seems that she suffered no prejudice
because the benefit she received following the transfer of Mr. Desrosiers'
rights to the residence is $28,220, from which the tax debt of $22,114,
resulting from section 160, is subtracted. There is still a benefit of $6,106.
As the amount she paid to Revenu Québec was only $2,100, she can still keep a
$4,006 benefit. The limit set by subparagraph 160(1)(e)(i) of the
Act is not exceeded.
[47]
For all of these
reasons, Ms. Gagnon's appeal is dismissed with costs to the respondent.
Signed at Montréal, Quebec, this 24th day of September 2010.
"Pierre Archambault"
on this 16th day of December 2010
Email this Content